Strategic Fit Analysis of Starbucks Corporation - Essay Example

? STARBUCKS COFFEE COMPANY ANALYSIS Table of Contents Table of Contents 2 Introduction 3 TASK A – Market Environment Analysis 3 PESTEL Analysis 3 Porter’s Five Forces Analysis 4 Critical Success Factors 5 TASK B – Starbucks Strategic Analysis 7 Strategic Capability 7 Resources and Competencies of Starbucks 7 Value Chain Analysis 8 Value Network Analysis 9 Task C – Strategic Fit Analysis 9 References 11 Appendices 13 Appendix – 1 (PESTEL Analysis) 13 Appendix – 2 (Porter’s Five Forces Analysis) 13 Introduction This report entails about the strategic fit analysis of Starbucks Corporation. The scope of this report is limited to the United States business segment of Starbucks which is one of the three reportable operating segments of the company apart from the International segment and Global Consumer Products Group segment (Starbucks Corporation, 2012). Starbucks Corporation is a US based company and is engaged in the business of purchasing and roasting whole coffee beans. It is regarded to be one of the premier brands of speciality coffee retailing in the world and operates its business in more than 50 countries of the world. Starbucks is headquartered at Seattle, Washington and was founded in the year 1971 (Yahoo Finance, 2012a). Its stocks are traded on NASDAQ Global Select Market with the ticker symbol “SBUX”. Starbucks is one of the fortune 500 companies of the world and has been ranked 229th in the fortune 500 list for the year 2012 (CNN Money, 2012). For the fiscal year ended October 2011, the US segment accounted for around 69% of the total revenues generated by the company (Starbucks Corporation, 2012). The revenues are generated in United States mainly through the licensed stores and company operated stores run by the company all over the country. Starbucks mainly operates its business in the speciality eateries industrial segment of US economy and has a market capitalisation of around $34.9 billion (Yahoo Finance, 2012b). The competitors of Starbucks in the US market include Caribou Coffee Company, Inc., Nestle SA, and McDonald's Corporation. This report would include a critical analysis of the various opportunities and threats concerning the company and its associated industry. It would also try to analyse the key strategic strengths and weaknesses of the company. Various strategic analysis tools like PESTEL, Porter’s Five Forces, etc. would be utilised to attain the objectives of this study. TASK A – Market Environment Analysis PESTEL Analysis PESTEL is an external environmental analysis tool, which is used for analysing the political, social, technological, economical, legal and environmental factors associated with an organisation like Starbucks (Henry, 2008, p.51). PESTEL analysis is particularly useful in analysing the macro environment associated with a business organisation. The PESTEL analysis of Starbucks (Appendix - 1) with respect to its US business segment is presented below: 1. Political Factors: Political factors do have some impact in the speciality coffee industry of United States because the green coffee beans are actually needed to be imported from other countries that are characterised of having tropical climate which is needed to grow coffee. Hence, if the trade relations that exist between US and the supplier country get deteriorated then this industry could have a negative impact on it. 2. Economical Factors: The recent economic downturn in US economy because of the Global Financial Crisis (GFC) is having a significant negative impact on the speciality coffee industry. Speciality coffee is generally considered to be a luxury good. Hence with the decrease in income levels of consumers in US, they tend to switch over to other lower cost substitutes available to them. Moreover the increasing prices of the commodities in the market are also having an adverse impact on this industry. 3. Social Factors: Social trends are also observed to have a significant impact on the speciality coffee industry in the United States. The coffee culture has evolved in the country over the years. There is an increasing popularity amongst the US consumers to drink coffee. Moreover, the demographics related to the consumers visiting coffee shops in US are also increasing. However, these consumers are also found to be price sensitive in nature and in cases of economic restraint they can move away from visiting the speciality coffee shops. 4. Technological Factors: Technology in the form of espresso machines operated by the companies in the speciality coffee industry is important for their sustainability. Technological advancements can lead to significant reduction in the operating costs of companies in the industry which in turn can increase its profitability. 5. Environmental Factors: Environmental factors in the form of rules and regulations concerning the speciality coffee industry and any type of environmental disasters occurring in the coffee beans producing nations can have an adverse impact on this industry. 6. Legal Factors: Legal issues concerning the speciality coffee industry like rules and regulations developed by the health authorities regarding production and consumption of coffee and licensing regulations corresponding to the speciality coffee industry in US can also have an impact on the industry and Starbucks. Porter’s Five Forces Analysis Porter’s five forces model helps an organization to assess the competitive forces which exists within the industry (Hill & Jones, 2012, p. 49). The forces which help out in the process are named as a) threat of new entrants, b) threat from the substitute products or services, c) bargaining power of the suppliers, d) bargaining power of the consumers and finally e) competition within the industry (Society for Human Resource Management (U.S.), 2006, p.38-39). This type of strategic analysis tool is mainly helpful in determining the impact of micro environmental factors concerning an industry in which a firm operates its business activities. The Porter’s Five Forces analysis of Starbucks (Appendix - 2) with respect to its speciality eateries or coffee industries in United States is presented below: a. Threat of New Entrants: The threat of new entrants in the speciality coffee industry in United States can be adjudged to be low or medium in nature. Large coffee retailers like Starbucks have successfully created an entry barrier for the new companies to enter the corresponding market. Starbucks also hold their edge over the new entrants in terms of supply costs incurred by them. b. Threat of Substitutes: The threat of substitutes in this industry can be adjudged as high, mainly because of the low switching costs for the buyers who can easily move to other alternatives of having beverages that have lower price range. Moreover, the consumers also have the option to buy coffee beans and prepare coffee at their home. Substitutes like tea products and soft drinks are also preferred by many consumers. There is an increasing trend of health consciousness amongst the customers as well. c. Bargaining Power of Suppliers: The growers of coffee beans are the major suppliers in the speciality coffee industry. There are numerous suppliers of coffee beans and the increasing demand of premium quality coffee beans is somewhat compensated by the large number of suppliers present in the market. Hence, the supplier power is low in this industry. d. Bargaining Power of Consumers: The buyer power is medium to low in the speciality coffee industry of US. It is so because the buyers in the industry are mostly individual consumers who buy in smaller volumes. Hence they are unable to exert significant impact on the market. However the switching costs for the buyers are low which increases the bargaining power of the consumers to some extent. e. Degree of Rivalry amongst Competitors: The speciality coffee industry in US is concentrated in nature mainly because the existing large players in the market accounts for majority of the revenues generated in the industry. The competitors are also observed to implement differentiation strategies to gain competitive advantage in the market. Large companies operating in other industries are also expanding their product offerings relative to the coffee industry. All these facts suggest a high degree of rivalry amongst the competitors in the speciality coffee industry in US. Critical Success Factors The critical success factors (CSFs) relative to any industry are those factors that have an impact on the market players in that particular industry to be able to sustain the existing competition in the market place. These strategic elements or factors affects the future success of an organisation and failure to address proper attention to those factors increases the risk of the organisation getting demolished from the industry (Gamble, and Thompson, 2011). Some of the CSFs corresponding to the speciality coffee industry in US is shown in the figure below: Figure – 1 CSFs in Speciality Coffee Industry Source: (Author’s Creation) TASK B – Starbucks Strategic Analysis Strategic Capability Strategic capabilities of an organisation can be defined as those capabilities which lead to long term sustainability of the business by gaining competitive advantage (Johnson, Whittington, and Scholes, 2011, p. 84). Resources and competencies are the two main building blocks of the strategic capability of any organisation (Brichall, and Tovstiga, 2005). The analysis of various available resources of Starbucks and its competencies to utilise those resources in an effective manner has been discussed in this section as given below. Resources and Competencies of Starbucks Resources can be in the form of either tangible or intangible resources. Tangible resources such as plant, machinery, property, etc. help in successful operation of the business activities of the companies. In case of Starbucks, its tangible assets include warehouse property and retail location, machineries and facilities related to coffee roasting, inventory, transportation equipments and brewing machines. All these assets are critical for the successful operation of business activities carried on by Starbucks. The balance sheet of Starbucks also includes a large amount of cash which is important to maintain a strong liquidity position of the organisation. Assets in the form of brand image, patents, copyrights, goodwill, intellectual property rights, etc. form the intangible assets of a company. These types of assets help in achieving the financial and operational objectives of an organisation. Starbucks is observed to have utilised its intangible resources in the form of strong brand image in an effective and efficient manner to provide high quality service to its customers. The human capital of Starbucks is also immense and has expertise in the field of product innovation, selection of appropriate location and marketing ability to be able to outperform its competitors and become one of the largest premier coffee brands in the world. Management capabilities in the form of distinctive skills, valuable human and physical assets, etc. are considered to be crucial to the sustainability of an organisation in a competitive market environment. Strategic planning in accordance with the company capabilities helps in implementing the strategies in an effective manner in an organisation. In case of Starbucks, it has a strong skill set in the field of creating innovative products and offering them in the market. This helps the company to stand out from its rivals and improve its financial position in a significant manner. The intellectual capital and human assets of Starbucks also proves to be one of its competitive capabilities. The leadership quality of Howard Schultz, founder, chairman and CEO of Starbucks is also commendable. The core competency of Starbucks is the knowledge based. It has been able to create its core competencies mainly through the leadership qualities of Howard Schultz along with the intellectual capital of the company’s management team. Starbucks prove to be a market leader in the speciality coffee industry of US mainly through its ability to provide innovative differentiated products in accordance with the consumers desire. Value Chain Analysis Analysis of the value chain is important for acquiring competitive advantage by any organisation (Porter, 1998). Competitive advantage can be attained by an organisation by optimising its value chain through the coordination of activities that lead to creation of product values which ultimately exceeds the costs involved in performing those activities (Bamford, and West, 2010, p. 155). The value chain system of an organisation mainly consists of the primary and secondary activities carried on by the company. The value chain analysis of Starbucks is presented below: 1. Primary Activities: a. Inbound Logistics: The inbound logistics of Starbucks mainly includes the agents of the company who have the responsibility to select coffee bean manufacturers, communication of quality standards of coffee beans, and organisation of the supply chain management system. b. Operations: The business activities of Starbucks are operated through the company owned stores and company licensed stores. As of October 2, 2011 Starbucks had 6,705 company owned stores and 4,082 licensed stores in US (Starbucks, 2012). c. Outbound Logistics: Starbucks primarily sells its products through its stores and does not have any intermediaries. However, in the recent times some of the products of Starbucks are being sold in various large supermarkets in US as well. d. Sales and Marketing: Starbucks is not found to invest much in marketing. It is mainly achieved through word-of-mouth communications because of its high brand image the high quality of services and products rendered to its customers. e. Service: One of the primary objectives of Starbucks is to provide high level of satisfaction to its consumers and it is an important part of strategic marketing (Proctor, 2000). Hence customer service forms an integral part of any strategic initiatives taken up by the company. 2. Secondary Activities: a. Infrastructure: Supporting activities carried on by Starbucks like management planning, accounting, finance, government relations and legal support constitute the infrastructural activities of Starbucks (Hitt, Ireland, and Hoskisson, 2009, p. 87). b. Human Resource Management: Starbuck's workforce is considered to be the most valuable resource of the company. Wide range of programmes related to training and development of the company's workforce are organised in a frequent manner. The employees are motivated through various kinds of performance incentives offered to them by the company management. c. Technological Developments: Technology is mainly utilised by Starbucks for cost saving purposes. High quality of products and services are also offered to the customers through the utilization of technological advancements within the organisation. d. Procurement: Starbucks procurement strategies are mainly related to the sourcing of raw materials in the form of coffee beans from its suppliers. The company also needs to procure machineries and building equipments for some of its supporting business activities. Value Network Analysis The value network allows the different companies to perform those tasks in which they are best. Secondly, it also helps to identify the disturbances in the supply chain much quickly. Finally, firms can always shift part of their operations to another partner for the smooth functioning of business. An efficiently managed value network always helps to reduce cost and increase the level of efficiency (Moore, 2010, p. 90). Value network analysis means visualizing, understanding and optimizing the internal and external value networks and the complexities of the ecosystem. In case of Starbucks, it has managed to build a strong value network for itself through the strengthening of core competencies of providing high quality products to its customers along with high level of satisfaction offered to them. Moreover, the company also has a strong strategic relationship with its suppliers and that is important for its sustainability and growth in future. Task C – Strategic Fit Analysis Starbucks has managed to develop several core competencies that has helped the company to grab the available external opportunities in the speciality coffee industrial segment of United States. Starbucks has developed a strong brand image for itself through its business activities which is mainly driven by the high quality products and services offered to its customers. The company has also developed a strong distribution channel strategy with the implementation of various technological advancements in its operating activities. The company is financially strong and has a large cash balance in its balance sheet. It has a huge market capitalisation in the speciality coffee industry of United States. Starbucks offer a wide range of products as well. It is known for its innovation and has been able to gain competitive advantage in the US market through the introduction of differentiated products that best suits the needs and requirements of its customers. The customer base of the company has also increased with the inclusion of newer customers from different demographics in the country. All these strengths of Starbucks that have been identified in this strategic analysis matches with the available opportunities existing in the external environment of the speciality coffee industry in US. The company has utilised the opportunity of growing coffee market in US by opening up many stores in the country. The company has managed to utilise its available resources in an effective manner to create core competencies and out beat its competitors in the market which is characterised of being highly competitive in nature. The company also maintains a good relationship with its suppliers which helped it to reduce the bargaining power of suppliers in the industry. However the weak economic condition of US is a major threat for the company. This corresponds with the weakness of the company of not being able to provide low price ranged products because of the nature of its operating industry. The competition from other major brands like McDonalds who are expanding their business activities into the speciality coffee industry of United States is also a major threat for Starbucks. This again corresponds with the weakness of the company of being concentrated in a specific industrial segment which is gradually becoming saturated. However, overall Starbucks has been performing its operational activities efficiently to generate increased revenues and profits. The company has managed to implement most of the critical success factors (CSFs) that have been identified in this strategic analysis in its business activities. CSFs corresponding to the services, distributions, technology and skills and capabilities have been addressed by the Starbuck’s management in an effective and efficient manner in all its operational activities. All these factors have resulted in creation of core competencies and gain competitive advantage by Starbucks in the US speciality coffee industry. References Bamford, C. E., and West, G. P., 2010. Strategic Management. Connecticut: Cengage Learning. Brichall, D., and Tovstiga, G., 2005. Capabilities for Strategic Advantage: Leading Through Technological Innovation. New York: Palgrave Macmillan. CNN Money, 2012. Fortune 500: 227. Starbucks. [online] Available at: [Accessed 29 October 2012]. Gamble, J. E., and Thompson, Jr., A. A., 2011. Essentials of Strategic Management. New York: McGraw-Hill. Henry, A., 2008. Understanding Strategic Management. New York: Oxford University Press. Hill, C. W. L., and Jones, G. R., 2012. Strategic Management Theory: An Integrated Approach. Connecticut: Cengage Learning. Hitt, M. A., Ireland, R. D., and Hoskisson, R. E., 2009. Strategic Management: Concepts & Cases. Connecticut: Cengage Learning. Johnson, G., Whittington, R., and Scholes, K., 2011. Exploring Strategy. 9th ed. Essex: FT Prentice Hall. Moore, K., 2010. Marketing: The Basics. London: Taylor & Francis. Porter, M., 1998. On Competition. Massachusetts: Harvard Business School Publishing. Proctor, T., 2000. Strategic Marketing: An Introduction, London: Routledge. Society for Human Resource Management (U.S.), 2006. Essentials of Strategy. Boston: Harvard Business Press. Starbucks, 2012. Form-10K: Annual Report 2011. [pdf] Available at: [Accessed 29 October 2012]. Yahoo Finance, 2012a. Starbucks Corporation (SBUX): Profile. [online] Available at: Read More